Nouriel Roubini Raises Concerns About Most Dangerous Trade

Headlines bearing Nouriel Roubini’s name can be triggering to those still traumatized by the 2008 Lehman Brothers crisis. He was among the very few economists who saw that meltdown coming and warned of its many knock-on effects.

More recently, New York University’s Roubini has been a stone in the shoes of the cryptocurrency faithful. For years, he’s said consistently that the price Bitcoin, what he termed the “biggest bubble in human history,” would plunge to zero. With the floor now falling out under crypto assets, Roubini tweeted: “this Ponzi house of cards is collapsing.”

So, it’s sobering to see “Dr. Doom,” as he’s known, turn his sights to the swooning Japanese yen. Its nearly 19% nosedive versus the dollar has caught the attention of many economic thinkers who’ve called the big megatrends of the last 20 years.

This includes former Goldman Sachs bigwig Jim O’Neill, who coined the BRICs—Brazil, Russia, India, China. He worries the yen heading to 150 to the dollar—from about 136 now—might prompt China to devalue the yuan. Few moves in 2022 would shoulder-check global markets more than that.

Raghuram Rajan, another early predictor of the subprime loan meltdown when he was chief International Monetary Fund economist, is watching Japan closely. Specifically, Rajan thinks global investors should be on the lookout for any signs “pressure on the bond market is increasing” in Tokyo.

And then there’s hedge fund manager Kyle Bass, founder of Dallas-based Hayman Capital. Roughly 10 years ago, Bass angled to pull a George Soros by shorting Japanese government bonds. Just as Soros “broke” the Bank of England in 1992, Bass hoped to get the better of the Bank of Japan. The short failed, but Bass is again speaking about Japanese debt.

Bass is warning anew about the yen. Japanese government debt, he says, is experiencing “discontinuous” moves that amount to a “very worrisome event that telegraphs investors losing confidence” in the central bank’s yield-curve-control policy “and the BOJ in general.”

Enter Roubini, who warns that the yen weakening just 3% more could trigger a change in BOJ policies that shake already jittery world markets. “If you go well above 140, the BOJ will have to change policy and the first change in policy is going to be yield curve control,” Roubini told Bloomberg recently. A further yen decline, he concludes, “will imply a change in policy.”

Big shifts in the yen don’t tend to go well for the global financial system. From the late 1990s to the early 2000s to the 2008-2009 global crisis to 2011, there are myriad well-documented examples of sharp yen moves slamming markets—and broadsiding hedge funds.

The risk is the so-called “yen-carry trade.” Ultra-low interest rates since the late 1990s morphed Japan into the world's largest creditor. Zero rates made Japan the funding source of choice for financiers everywhere. They would then carry those yen borrowings over into higher-yielding assets: U.S. Treasury securities, New Zealand corporate debt, Indian stocks, Thai real estate, Indonesian infrastructure, U.K. derivatives, South African futures, cryptocurrencies, you name it.

When the yen suddenly zigs and investors need to zag, markets across the globe feel the shockwaves. Big yen moves really are the financial equivalent of a rug being yanked out from under assets and sectors everywhere.

The U-turn to which Roubini refers could be more dangerous than traders from New York to Singapore may appreciate. There’s a reason BOJ Governor Haruhiko Kuroda’s team in Tokyo keeps the monetary spigot open wide indefinitely: until now it’s had no choice.

This policy dates back long before Kuroda took the BOJ reins in 2013. Because a revolving door of change-averse Japanese governments did zero to address the bad loans from the 1980s and the deflation that followed, the BOJ had to step up to support a $5 trillion economy.

The BOJ first cut rates to zero in 1999. Since then, it’s tried to push them into negative territory via so-called “quantitative easing.” But like any substance abuse problem, the body—or economy—can only take so much. First, it requires bigger and bigger doses to remain calm. Then the negative side effects force you to consider sobriety.

The turmoil in the yen and Japanese bond yields has the BOJ on the precipice of the monetary equivalent of a 12-step program. And the global financial system won’t be much like its most reliable punchbowl being yanked away.

The knock-on effects will be as unpredictable as they are unwelcome. In 2022, after all, investors are navigating the worst U.S. inflation in 40 years, China’s “zero Covid” obsession sabotaging the No. 2 economy, Russian aggression in Ukraine causing dueling energy and food crises and overvalued stock markets hoping for soft landings.

The loss of yen liquidity would mean the background music of global finance is stopping, leaving virtually everyone, everywhere, scrambling for a chair. This doesn’t mean another 2008 or a “Black Swan” event. But with disaster seers like Roubini looking Tokyo’s way, it’s hard not to see this as a dangerous, buckle-your-seatbelts moment.